This was a Draft Chapter for Report on the Family and Societal Change Programme project which was never published. (March 1996)
Keywords: Globalisation & International Trade; Labour Studies; Social Policy;
The internal activities of and relationships within a firm (or other economic agency such as a government department), are heavily influenced by the external pressures on the firm. As the case studies in the next four chapters will show the three firms and one government department have experienced major changes inside them, especially in terms of the industrial relations and its impact on the family life of workers. To understand the pressures for these internal changes we need to provide a context of the changes in the firm’s external environment.
Undoubtedly the most important change has been the increased globalization of economic activity, the growing (but still incomplete) integration of the world economy. Whereas twenty years ago many, if not most, New Zealand firms could ignore what was occurring to analogous firms overseas, today the majority of firms experience some direct (or perhaps indirect) competition from their foreign counterparts. However, there has been aspects of globalization peculiar to New Zealand. In particular the New Zealand economy has undergone a much greater change in its structure over the period, as falling profitability (or terms of trade) of pastoral farming forced a massive process of diversification. The New Zealand policy response has also been more extreme.
Globalization is not the only world wide phenomenon which has shaped the external environment of the New Zealand firm. Throughout the OECD there has been stagnant real wages, rising real interest rates, and higher unemployment compared with the early part of the postwar period. There is no compelling explanation for this empirically observed change in factor prices, but it is possible to trace how the change impacted on firms, changing the way they related to their labour. Another, and probably independent, influence has been the increased participation of women in the (paid) labour market.
The chapter goes on to trace how these external pressures have transmitted into the internal industrial relations workings of the firm. This has included intensification of the work process and related organizational changes; contracting out where the boundary of what constitutes the firm has moved in, with the externalized activities supplied by other firms or by the self employed workers; and as the case studies show in surprising detail the demise of the family friendly firm. That traditional entity, “the family firm”, was not only owned by a family, but frequently organized itself as if the workers were a part of a family, albeit a paternalistically led one. The changes traced here seem to have not only replaced family ownership by share-market ownership, but to have reduced the ability of the firm to treat its workers as family.
The final set of effects effect traced here are the rise of job (and income) insecurity of the worker, which has impacted on the welfare state, ending the traditional form of what Frank Castles calls the “wage earner’s welfare state“. At this stage we cannot readily predict what the new form will be, although there are tantalizing hints in the case studies that some workers may receive services which were traditionally provided by the welfare state from their employers instead.
In 1950, as the world settled into its post-war era, the total of world merchandise exports amounted to 7.1 percent of GDP. By 1993 the figure was 17.1 percent. The growth of international trade in services (most notably tourism) is comparable but at the same level, and aggregate foreign investment is typically an increasing share of aggregate capital.
Paul Krugman points out that the quantitative change in trade has also been associated with qualitative changes. He identifies four:
– the rise in intra-industry trade, that is trade in similar goods between similar countries. (The only country with which New Zealand has significant intra-industry trade is Australia.);
– the slicing up of the value chain, that is the breaking up of the production process into many geographically separate steps. (New Zealand tends to be most involved in the first step based on local primary products which are sent overseas in a raw or semi-processed state, or the last step in which the components are assembled as a finished product for the domestic market. Even so, some examples are evolving. New Zealand manufactures wheel hubs from aluminium smelted in New Zealand from Queensland bauxite, and the hubs are exported to the US for cars which may be exported in turn.);
– super trading economies with exports equal to more than a half of GDP. (Krugman identifies six – including Hong Kong, Malaysia, and Singapore – which together take just under 8 percent of New Zealand exports and supply just under 6 percent of the imports.);
– low wage manufacturing exporters, sometimes called Newly Industrialized Economies (NIEs). (Of New Zealand’s top ten export destinations, the Republic of Korea (5th), the People’s Republic of China (6th), Taiwan (7th), Hong Kong (9th), and Malaysia (10th) meet this category. Two of the top import sources, Peoples Republic of China (6th) and Taiwan (7th), are also NIEs.)
In addition multilateral reciprocity needs to be added to Krugman’s list. although there are regional trading blocs and bilateral arrangements (notably in New Zealand’s case CER with Australia and SPARTECA with South Pacific nations), world trade is organized upon a system of multilateral relationships, especially through the General Agreement on Tariffs and Trade. This has meant that when New Zealand has been seeking improved access for its products (particularly primary products) it has had to give concessions to all countries. A good example of the consequences of multilateral reciprocity is that when access for cheese to the European Union was negotiated in the 1980 Tokyo Round in exchange for reduced protection on strong beers, the main beneficiary was Australia (and the New Zealand consumer). Even bilateral reciprocity involves concessions, so that improved access to the Australian market under CER involved New Zealand abandoning import control and tariffs against imports from Australia.
These quantitative and qualitative changes, which are summarized in the term “globalization”, have been both a consequence of, and a cause of reduced barriers against trade. There are few countries who now pursue inward oriented economic policies, ignoring the growth potential of export markets. Those that do have had notably poorer economic performances as measured by growth in per capita income.
The gains from external trade are probably not the allocative gains which are drummed in a first year economics course, using the comparative advantage model first expounded by David Ricardo. As measured, those gains seem small. Rather, as the earlier quoted statistics suggest, if export markets tend to grow more rapidly (in part because consumers demand more exotic products as they grow richer), exporting involves selling into growth markets in contrast to the more sluggish domestic markets. Meanwhile the competitive pressures required to perform well in international markets feedback into better domestic performance. In addition to these growth stimulants, we should note that improvements in transport and telecommunications have made international trade easier.
It is difficult to envisage a plausible scenario in which New Zealand could have resisted the globalization process, so dominant (and successful has it been). However there were two further factors which pushed New Zealand in the direction of opening up its economy to the rest of the world.
For the first two thirds of the twentieth century, New Zealand was a monoculture as far as the rest of the world was concerned. It grew a single product of grass, which was processed through sheep and cattle, and thence through freezing and dairy works, to export as wool, meat, butter, and cheese. This monocultural status was reinforced by over half of all exports going to a single market, Britain.
This phase came to an end in 1966, when the price of wool fell, never to recover (except in 1972 and 1973) relative to import prices, reinforced by a secular weakening terms of trade for meat and dairy products (especially butter).
The New Zealand economy responded by diversifying its products and markets. According to John Gould the export concentration ratios by commodity classification or by destination shifted from an extreme level in 1965 to middling ones in 1980. No other country among sample of 19 in the OECD changed as much.
We need not detail the shift from exporting wool, meat, butter and cheese to an wide variety of pastoral, horticulture, fish, forestry, energy and manufacturing products, and tourist services: from Britain to Australia, Japan, the United States, and numerous East Asian NIEs. Rather here we trace the impact of these changes on the typical New Zealand firm.
The (externally) monocultural New Zealand economy, supported many domestic industries behind a wall of protection, primarily relying on import restrictions, but also upon tariffs. (In addition, but much more difficult to document, was a panoply of arrangements which had a similar impact on the service and other non-manufacturing industries.) The effect of this protection was to transfer income from the export sectors to the domestic oriented ones, by forcing the former to purchase their inputs and consumption goods from the latter.
It appears that this was not at a great loss of economic efficiency, probably because the transfer was of the land rents of the pastoral sector. However the collapse in their terms of trade reduced, and often eliminated, those land rents so that the transfer mechanism could no longer work.
To put the situation another way round. Once upon a time the pastoral sector could support the rest of the economy by generating the foreign exchange the domestic sector needed. When its relative export prices fell the sector could no longer provide this support, and so the burden of foreign exchange generation was spread across most other sectors. To their credit they responded magnificently (and quickly). Moreover the diversification involved those sectors which supplied the direct exporters, so that most of the business sector was involved. (We shall discuss the public service sector later.)
However if everyone is involved in foreign exchange earning (and saving), then they cannot be at the same time protected, and so the broad sweep of protection had to be wound back. It is true that a particular sector could have had its sector maintained, but to do so would have involved it becoming a burden on the rest of the economy which was straining at exporting.
One could argue, as did Peter Elkan, that there were gains from some protection of the manufacturing sector. This possibility was not explored to any extent. However such a protection regime would have been different, and lower level, than the regime which dominated the first part of the post war era. In any case this is not an argument for a regime which selectively favoured a few preferred industries, as is sometimes advocated by the industry incumbents.
The issue was not simply one of the abandoning of import controls and major reductions in the tariff regime. There were many more non-market interventions (including subsidies) which had effects not dissimilar to border protection in that they protected the domestically oriented firm from market pressures, and in doing so discouraged the seeking of greater efficiency and better customer service. As the firm was frequently a supplier to the exporters (and/or import substituters) there was a concomitant policy of market liberalization, in which the various domestic protective measures were also removed.
These changes towards increased market regulation of the economy that almost all the business sector was exposed to increased competition, in a globalizing world in which foreign firms were seeking more markets, even in as small and a distant economy as New Zealand. Thus between the international globalization and the loss of the protection consequent upon the diversification, the New Zealand firm faced much harsher external environment (even when it was not directly exporting). The old regime of domestic market stability had ended. Nor could it be returned to, other than if pastoral export prices were to lift and generate those rents again.
This mixture of globalization reinforced by external diversification was probably the single most important change in the economic environment in the last two decades. But there were others.
The Policy Response
We have explained the change in the policy regime, focusing here on the abandonment of border protection and market liberalization, as a response to new external conditions. However while the general direction of the response was largely determined – New Zealand could have gone for a fortress economy strategy, but it would have been a much poorer one -the extent of the liberalization was not.
The point to be made here is a simple one. As a general rule the new measures were extreme, and pragmatic considerations (such as whether there was a case for a moderate level of manufacturing protection, and what form it might take) were ignored in favour of a purist ideology that all government intervention in the economy was considered necessarily bad.
We need to make this point here, because while changes to the welfare state were inevitable, as we shall explain, the extremist ideology was applied there even though it was far less obvious to a pragmatist that it was relevant or would work.
Factor Prices and Unemployment
The world economy – at least that of the rich (OECD) countries – appears to have undergone some climacteric in the mid 1970s, when the increase in technological change began to decline, and unemployment began to rise. Real wages stagnated on average, while wage dispersion increased, followed by rises in real interest rates from the early 1980s. Economic climacterics are not easy to identify or explain – there is still much dispute over the British climacteric of the nineteenth century – but what seems clear is that some fundamental change occurred in the world economy involving some sort of slowdown in the growth process, less growth in labour productivity (which may be thought to be a crude measure of the rate of technological innovation) and changes in factor prices and factor usage.
While it may be debated whether, or to what extent, New Zealand could have insulated itself from the world changes, the record is that largely the same phenomenon occurred to the New Zealand economy. Wages stagnated and wage dispersion increased, while real interest rates increased, as did unemployment. The most likely explanation for much of this phenomenon was that either the not well understood processes occurring in the rest of the OECD also occurred in New Zealand, and/or the general OECD factor price changes were transmitted through the trade and capital markets into the domestic markets.
What is important for our purposes is that the situation facing the domestic firm was changed. Labour – especially lesser skilled labour – was relatively cheaper, and more abundant, while capital was dearer. This changed the factor market conditions facing the firm.
Given the labour market was looser (from the perspective of the firm – albeit tighter from the perspective of the worker), the firm could be more casual in its use of the labour. It did not for instance, have to hoard labour during economic downturns, nor coset it to retain firm loyalty. On the other hand capital was more expensive, so firms were forced to use it more effectively. A range of financial innovations – notably leveraged purchases of equity – added to these capital pressures.
To put the same point another way, a higher real interest rate foreshortens the time horizon. A firm paying say, 5 percent p.a. on interest, might be thought of having a vision up to 20 years out. If the rate goes to 20 percent p.a., the vision is down to five years. Suddenly investment in plant and equipment, in research and development, and in the labour force become less attractive. The intensification of the work process, the loosely attached worker, contracting out, and the shifting costs of vocational training onto the worker all become more attractive.
(There is one caveat here to the existence of a climacteric in the 1970s, associated with a reduced rate of technological innovation. It is possible that the information technology revolution which might be said to start in the mid 1980s as processor costs fell dramatically, has speeded up technological innovation across the whole economy. I have not seen any studies which have explored this systematically. In any case it is too early to make the judgement. That some sectors are under astonishing rates of innovation is not the same thing as the same thing is happening to the economy as a whole.
But suppose that the innovation rate has risen. This does not seem to have impacted on real wages, wage dispersion, nor real interest rates, suggesting that the changes which occurred fifteen years or so ago, were not driven only by the climacteric. My hunch is that key to the interest rate changes has been the high US government deficit, which has had a noticeable impact on the world savings balance, and which would in theory push up real interest rates as investors competed for the scarcer savings.
Since the US deficit is still to be addressed, real interest rates remain high. The trouble with this explanation is that wage stagnation occurred before the Reagonomic deficits. I am inclined to explain the stagnation as a response to the climacteric, with less technological change to fund real wage increases. Indeed one might explain the huge US deficit as a response to the slowing down of growth, with resolving the tensions from the smaller than expected cake, by borrowing from future cakes – which is the effect of the government deficit. However once real interest rates rose they put downward pressure on wages, thus maintaining the real wage stagnation.)
The Participation of Women in the Labour Market
Before discussing these changes to the workplace, the phenomenon of women becoming more involved in the (paid) labour market needs to be noted. This is well recorded in New Zealand and elsewhere. It is also a probably phenomenon quite independent of the other global phenomenon we have already noted: globalization of trade and capital, and the climacteric and the factor price shift.
The increasing activity of women in the labour market, has a number of economic impacts. The pattern of consumption is changed more eating out, commercial child care, and products which simplify the management of the home. There is also an impact on the labour market since the labour skills the women offer, and the employment they want is different from those of men. In labour market terms women tend to be less skilled, and they are more interested in part-time employment. Third, and obviously but not to make too much of it, women bring some different characteristics in the workplace which require some differences in worker management.
Thus rising participation of women has altered markedly the labour market outside the firm, and internal relations within the firm, as well as impacting on the pattern of consumption and the income distribution. (In the latter case, their earnings have to some extent offset wage stagnation, so that family real incomes have risen even though individual incomes have not.)
Employment within the Firm
Thus far the sections have described changes in the macroeconomic environment. They may be summarized from the perspective of the typical firm compared to their situation a couple of decades earlier.
First, as a result of globalization and diversification (reinforced by the policy responses), each firm faces greater competitive pressures. Earlier the firm had been a monopoly, or there had been some market intervention which meant any competition was usually of a gentlemanly kind. Note that competition increases the uncertainty a firm faces. In financial terms the risk premium required by investors rises, and encourage measures which shift risk onto others (notably onto employees and subcontractors). Note also that successful managers of firms under greater competitive pressure are going to have to exhibit greater aggression, and that it is unlikely that such aggression can be confined to the firms outward stance only, so that the internal arrangements of the firm are also likely to be administered more aggressively.
Second, as a result of changes in world factor markets, the cost of capital rose (even excluding the higher risk premium) while labour – especially unskilled labour – became cheaper and easier to acquire. Thus labour management and hoarding became a lower priority, while employees became ready target to shift some of the risk off the firm. Moreover the higher interest rates shortened the firm’s time horizon, discouraging strategies of investing in the human capital and loyalty of its workers, which with the risk premium had the effect of detaching many workers from the firm.
A couple of changes in industrial relations management illustrate these effects. First there was an intensification of the work process. Labour hoarding became increasingly less necessary (except perhaps for particularly scarce key skills), since the pool of unemployed outside the firm could be called upon when additional workers were required. Those workers within the firm became more dispensable, since they were more easily replaced.
A second major change was contracting out, that is buying services from the self employed and other firms, rather than providing them within the firm. Contracting out involves an ability to monitor the activities of the outside contractor, with some precision. One suspects that technological changes (of the hard and soft variety) in recent years made this more feasible. Undoubtedly a major factor has been that contracting out shifts uncertainty away from the firm to those outside it. (For example, suppose a firm contracts out the supplying of the canteen. If any thing goes wrong – such as food poisoning – the primary firm is not responsible, while if it is decided to dispense with the canteen altogether it is the contract supplier which makes the largest adjustment.) This is an example of “risk shifting”, discussed in relationship to the welfare state, below.
A consequences of these changes is what might be called the demise of the family friendly firm. Often these firms were family owned, but the feature we trace here is that they were run as a sort of family, albeit the owner/manager was typically paternalistic. He (it was usually a he) knew the workers in the firm personally, and managed the firm to look after them and their families. Often workers were attached to the firm for life including after the retirement, and the firm collectively grieved their death, even when the dead had retired some years earlier. The three case studies of private firms detail the general phenomenon.
(While the case studies do not claim to be representative, anecdote suggests the phenomenon they describe existed much more widely than just the few cases selected here. However that does not answer the question whether there were firms which were run on other lines. It seems likely that there were. The very large industrial plants are an obvious group. Even so there were many family friendly elements in the ones the writers knows about – e.g. freezing works – but the family friendly structures were administered more by the unions or the unions and firm management together. At this stage this is anecdote and conjecture, but it would be worth exploring to what extent that very large plants have undergone a transformation too.)
We may wonder if the family friendly firm was inefficient, and its demise was inevitable. There is not the systematic analysis to make a confident assessment, but it seems likely that the family friendly firm was efficient in its time. The loyalty and morale it generated probably rewarded the firm with a higher level of productivity than if a less personal oriented approach had been taken. The three case studies involve firms which were markedly successful under the old economic conditions.
Is the family friendly firm inefficient today? The case studies suggest they may be, since in each case the firm has been transformed to a more impersonal industrial relations arrangement. We have described the mechanism of the transformation but that in itself does not explain why the more person oriented management became less successful.
The most likely possibility is that the hike in the interest rate shortened the time horizon for management practice. The traditional family-friendly firm was an ongoing relationship with a long time horizon. The current practice of more impersonal, more detached, workers involves a much shorter vision. (One might contrast them by comparing a marriage with a one night stand.) Thus the rising cost of capital, both in terms of the higher real interest rate and the additional risk premium, has shortened the management vision and pushed it towards the impersonal approach.
Even so, we cannot rule out that in the long run some more personal oriented labour management may be superior to the impersonal one. It is a matter of the hare and the tortoise with the slow and steady family friendly firms winning the race in the end, with the more attached workers are more productive, because of – among other things – greater loyalty, commitment, and morale, the advantages of learning-by-doing on the job, a greater acquisition of skills (because of confidence in job security, and also because the firm assists that acquisition), and so on. But this is a hypothesis which is yet to be tested. In any case it is possible that the race is run in a different way. Perhaps the hare uses the initial advantage to pull up the bridge so the tortoise has to swim and drowns (or gets eaten by the crocodiles). Similarly the short term effects of competition may destroy the family-friendly firm even though in the long run it might be superior.
This, one admits, is conjectural, or more precisely hypothesizing without the data yet available to test the conjecture. We need also to be aware that the new family-friendly firm is likely to be run in a quite different manner to the traditional one.
The Changing Welfare System
Frank Castles has described the post-war New Zealand welfare system as a “wage-earner’s welfare state”. In it firms delivered only one (or perhaps two) significant welfare services to their workers. The first was job security, and the second income security, but to a lesser extent since there was certainty over hours worked and real wages paid. This can be seen vividly in Richard Braae’s estimates of non-wage labour costs (NWLC) to the firm of 24 percent of total costs. In contrast the ratio for Germany was 41 percent, Italy was 52 percent, the United Kingdom 23 percent, and Japan 17 percent. Especially relevant is that over half of which were pay for time not worked – e.g. holidays, sick-days, while the cost to the employer of social security type payments (mainly employer’s superannuation and ACC) came to only a fifth of NLWC. The vast majority of the cash and in kind transfers the worker received were through the state in exchange for the taxes which the workers paid.
Yet this job security was central to the welfare system. A major fact in keeping down its costs to the state in the first thirty to forty years after the 1938 Social Security Act, was that few workers were unemployed and entitled to a benefit. Conversely as unemployment rose, first after 1966, and then even more strongly in the late 1970s, the state came under funding pressures as real tax revenue fell and social security expenditures rose (which were compounded by a number of other changes not important to our story like inflation and increasing government subsidization of industry, to the extent the outcome was an ongoing fiscal crisis, ameliorated only by high rates of inflation).
The rising unemployment was (perhaps not surprisingly) associated with slower economic growth. So the government fiscal position were caught in the vice of slow and stagnating real revenue growth, and rising demands as a result of the slow growth/stagnation, but compounded by pressures from the education and health system. Especially relevant here is that the public’s demand for public spending on education, health, and social security (as well as other government spending) is not subject to a private income constraint, in the way that one exists for private spending. It became, in the circumstances, very difficult to restrain the demand pressures on the government budget. It was not that the governments after 1985 was unsuccessful at this restraint. But the pressures were constant and unresolvable under the traditional post-war regime. There was a sort of inevitability that the dam would burst unless a new regime of government expenditure control was instituted.
For our purposes there were two important responses to the fiscal crisis which had beset the economy since the late 1970s. The first was an attempt to run the government agencies more efficiently. It was argued that government agencies were wasteful of resources. The first stage was that of the corporatization of state owned enterprises (SOEs), which were shifted from a bureaucratic form of administration to a business one. The case that bureaucratic administration did not suit economic agencies operating in a market environment is not hard to sustain.
The result of corporatization was a major change in their internal operations, including industrial relations. In particular the family-friendly arrangements were replaced by the more impersonal ones evolving in the private sector. Workers were dismissed, or their work contracted out, giving the impression of major gains in efficiency. The actual gains are less clear. For instance contracting out may give substantial increases in output per core worker in the firm, but the industry gains may be less, if any, when the contracted workers are included in the denominator of the labour productivity measure (thus biasing the measure upwards). On an economy wide scale if the industry-redundant workers are not re-employed their extra social security benefits, and additional health and other services as a result of their ongoing unemployment, becomes a burden on the economy, which have to be deducted from any industry gains.
However the next step in the reform of government agencies was not so coherent. The logic seems to have been if a business regime resulted in efficiencies in some sense to the SOEs, then there would be gains if all government agencies were put on to a similar basis. The most crass example of this argument is in the report Unshackling the Hospitals (a.k.a. the Gibbs Report), in which some data was provided which purported demonstrate that the hospital system was inefficient. It then simply stated, without any proof, that business administration would remedy these alleged inefficiencies. In terms of a well worn economics idiom, the Gibbs report gave the prize to the second singer in the contest, having only heard the first. This is the stuff of ideology rather than rational decision making.
But this was not a lone example. The central aims of the State Sector Act (1988) and the Public Finance Act (1989) was to place government agencies on a business like basis as far as possible, even when they were not marketed oriented. We see the consequence of these changes on the internal industrial relations in the fourth case study which involves a major government policy advice agency, and where the industrial relations changes are remarkably similar for the three trading firms described in the earlier case studies.
To make these points is not to deny there was a case for significant reform in the management and operations of the state sector. However the extraordinary feature of the reforms was the uncritical acceptance of the business model – the prize went to the second singer without apparently anyone finding out whether she could even sing the aria.
These reforms did little to contribute to the resolution of the fiscal crisis, other than they enabled the government to substantially reduce relative wages in the public sector relative to the private sector. Wage restraint aside, the effect of the changes may have been reduced inefficiency, as each upheaval failed to reap significant productivity improvements, while losing the institutional memory. However the losses were not always financial ones. The judge investigating the deaths of 13 people when a Department of Conservation platform collapsed at Cave Creek, attributed this to failure to the reforms. It is inconceivable that there are no other examples of these sorts of social costs engendered by the changes, and we cannot even be sure that this is the most tragic example – the health reforms, for instance, may have cost more lives in total.
Theses examples of shifting of social costs onto household illustrate the most effective means of resolving the fiscal crisis. Instead of the government bearing many costs as it had done traditionally, individual households (families and persons) found themselves bearing them instead. Social support entitlements were reduced, and user charges imposed and increased.
An example which is headlines at the time of writing well illustrates the change. The government continues to subsidize most pharmaceuticals, although since 1984 there have been user charges. When total expenditure on pharmaceuticals increases above the expected level, it is described in the jargon as a “budget blow out”. In the past the financial consequences of the out were accepted by government as its responsibility. However in the 1995/6 year the government contribution to the pharmaceuticals budget (now administered by a government agency Pharmac, which appears – not surprisingly – to be run on “business” lines) is thought to be over budget by about $30 to $40 million (on a total budget of around $700 million. However rather than the government (in this case the RHAs) providing the agency with a sum to cover the blow out (and a “tut tut”), Pharmac is to recover some of the excess by increasing charges to people using some medications for stomach complaints and heart conditions, as well as for cold sore creams, sun tan lotions, bees-wax and “banana-flavoured condoms”. One may well question whether all of these medications should be at the public expense, but what is significant here is that the decision to review them is due to a blowout rather than some orderly planning decision about entitlements. It also seems there may be a return to monthly prescribing which means that patients will be involved in visiting their pharmacist more often, adding to their inconvenience and expense, but saving Pharmac some $28 million. Thus the costs are shifted from the government to the household.
This “cost shifting” is sometimes called “risk shifting”, partly because it does not apply to all people but only those who are at risk. In the past their risks were “insured” by the government. Now it is the individual and her or his family who is increasingly more exposed to the costs incurred by the risk, be it sickness, income deficiency, the need for educational and vocational training, or whatever.
Behind this risk shifting has been the fiscal crisis, a major precipitant of which was the shifting of employment and income security from the firm to the government. In turn the government has flicked the responsibility on to households. What I now want to speculate is whether some households in turn will shift their increasing risks back on to their employers.
A New Type of Family Friendly Firm?
We have seen how in recent years firms abandoned responsibility for job security, and pushed responsibility for income security on to the state, which in turn pushed some of its responsibilities onto the household. It belongs to another venue to discuss the possibility as to whether households will retaliate through the political process and return some of the risk shifted on to them back on to the government (as has already happened in the case of New Zealand superannuation and perhaps also for health). Here we consider whether, and to what extent, households might complete the circle, and shift their risks back onto the firm.
The first thing to notice that firms still seem bloody minded about costs. For instance while the accident compensation levy is only a small part of the total outlays on workers a coalition was announced in March 1996 with the aim to reduce the spending further (in effect shifting the risk onto the household). Second New Zealand has an almost comprehensive fringe benefit tax, which means that there is little incentive to offer private social security and other services to workers as a means of tax avoidance.
These factors might suggest that there is little reason to assume that firms will begin to offer additional services and benefits to their workers, above direct renumeration. However suppose a firm decided that it would be profitable to have a more stable workforce, one which was attached to the firm and loyal to it. It might think that such a workforce would be more productive through its greater commitment to the firm, its willingness to acquire firm specific skills, that it would work smarter, that recruitment would be easier, that the firm as a good employer would have a better public image, and that redundancy costs would be lower. Additional direct remuneration might not be sufficient to induce such loyalty and the firm would seek alternative reward systems which added to wages and salaries other firm specific benefits. The firm might provide an earnings related superannuation scheme, medical insurance, housing assistance, (readily available or subsidized) childcare, superior bereavement and parental leave, education and training packages, counselling and other support, recreational facilities, and so on. Senior managers knowing more workers on personal terms could also contribute to the overall commitment of the firm to the individual workers. The non-wage costs would rise as a proportion of the total wage costs, but providing productivity responded the firm could afford to pay the total package.
Such a firm would have sufficient characteristics to be called family-friendly. Practically it might not offer all these benefits. Indeed each facility would be the result of a careful calculation based on whether it would be paid for by the productivity gains, or whether the money could be better employed in some other way.
This is all hypothetical as far as the case studies in the next few chapters are concerned. Obviously one of the firms described there will never move to this strategy since it is almost closed down, two others are still in a restructuring stage with the need to leave open the possibility of further redundancies, while the government agency is currently experiencing too much policy instability. At this stage in the research the possibility of the new type of family friendly firm is only speculative – it may be that none yet exist because they are all in the wrong stage of the restructuring cycle.
Moreover the strategy will not apply to all firms. It would be most relevant to firms were the labour force is skilled, and where redundancy and recruitment costs are highest. Such workers are members of what is described as the primary labour force in dual labour market theory. Those in the secondary labour market, associated with low skills, high turnover, and generally conditions of job instability (including long and frequent periods of unemployment) will not end up in a family friendly firm, because their costs would be too high. Indeed the shrewd firm embarking down this path is likely to layoff or to contract out those jobs in the secondary labour market, adding to the instability of those who are moved outside the firm’s boundary.
The possibility then is a bifurcation, with one group of firms whose workers are in receipt of a privatised welfare system, and a second group of firms whose workers are reliant on an increasingly mean state provided welfare system and their own slim resources. As we have emphasized this possibility is at this stage but speculative, but it is well to observe that the current situation which the case studies describe is unlikely to be stable, even if we are less sure what the next stage will be.
What this chapter has shown is how the changing external environment in recent decades will press in on the internal arrangements within the firm, changing them including, and not least the industrial relations arrangements. In doing so it has anticipated the next four chapters, but they will provide a much richer detail of those changes than can this schematic description.
1. P. Krugman (1995) “Growing World Trade: Causes and Consequences”, Brookings Papers on Economic Activity, No 1, 1995.
2. S. Bano & P.Lane (1989) Intra-Industry Trade: The New Zealand Experience (1966-1987), Economics Department, University of Waikato.
3. D. O’Dea (1985) “Import Licensing: Strong Beers and Light Cans”, in A. Bollard & B. Easton Markets, Regulation and Pricing NZIER Research Paper 31, p.95-111.
4. New Zealand has also made unilateral reductions in its external protection.
5. This section is a summary of Chapter 5 of B.H. Easton (1996) In Stormy Seas, Otago University Press, Dunedin.
6. J. Gould (1985) The Muldoon Years, An Essay on New Zealand’s Recent Economic Growth Record, Hodder & Stoughton, Auckland.
7. An important feature of the tariff regime was that rates were low on manufacturing inputs but high final products, so that effective rates of protection on domestic processing could be exceptionally high.
8. Some idea of their range can be gleaned from the list of changes in A.E. Bollard & J. Savage (ed) (1990) Turning It Around: Closure and Revitalisation in New Zealand Industry, Oxford University Press, Auckland, p.38.
9. There may have even been gains from the protection if industrial and firm economies of scale were strong enough, but this is not critical for this argument. See P.G. Elkan (1977) The Meaning of Protection, NZIER Research Paper No21.
10. op cit.
11. This section is a summary of B.H. Easton “Distribution”, Chapter 3 in A. Bollard, R. Lattimore, & B. Silverstone (ed) (1996) A Study of Economic Reform: The Case of New Zealand, North Holland.
12. The exception is that there is little evidence of a slow down in technological change. See B.H. Easton, In Stormy Seas, Chapter 14.
13. Another change was that as inflation reduces, capital gains become less available, and the firm has to work the capital harder to make the same return.
14. Which it may well do on the margin when the standard interest rate is 10 percent p.a.
15. Krugman op cit may explain the rise in wage dispersion from pressures from low wage countries on low skilled workers as a result of globalization. But that does not explain falling average real wages, nor rising real interest rates.
16. e.g. K. Saville-Smith, M. Bray, C. Davidson, & A. Field (1994) Bringing Home the Bacon: The Changing Relationship Between Family, State and the Market in New Zealand in the 1980s, NZIRD, Wellington.
17. It could be argued that the labour market undervalues women’s skills. What however is important for our purposes, is that their employment is concentrated in particular parts of the labour market, different from men and, in the traditional labour market hierarchy, in areas of lower skill and inferior pay.
18. I add an impression, which has not been tested, that the chief executive officers often found personnel (or as it was renamed “human resource”) issues personally distasteful. Contracting out adds to the distance between them and the workers who (now) they were indirectly employing. If this hypothesis is proven it does not explain the demise of the paternalistic family-friendly firm as a result of different attitude of the new CEOs, but suggests that they were appointed to their jobs because they were more comfortable with capital and financial issues, and human issues were less important to them.
19. See B.H. Easton “The Postwar Welfare State”, Social Policy Journal, 1996, forthcoming.
20. F. G. Castles (1994) “The Wage Earners’ Welfare State Revisited: Refurbishing the Established Model of Australian Social Protection, 1983-1993”, Australian Journal of Social Issues, vol 29, no 2, p.120-145.
21. R. Braae (1984) “Non-wage Labour Costs”, Quarterly Predictions, June 1984.
22. The composition was: pay for time not worked 13%: payments in kind 3%; employer’s social security payments 5%, training and welfare 1½%; taxes of a social nature 0%; payroll taxes 0%; other costs (costs of hiring and firing workers and redundancy) 1%.
23. Department of Statistics (1990) The Fiscal Impact on Income Distribution 1987/88, Wellington.
24. B.H. Easton (1997) ibid, Chapter 8.
25. But as it happened slightly faster in the late 1970s and early 1980s than the OECD, which was slowing down after the climacteric. After 1985 New Zealand stagnated, while the OECD grew.
26. I. Duncan & A.E. Bollard (1992) Corporatization and Privatization: Lessons from New Zealand, Auckland, Oxford University Press.
27. A further complication is that in some industries – most notable telecommunications – there was substantial technological change underway, which increased worker productivity, but of course cannot be attributed to the corporatization program.
28. Hospital and Related Services Taskforce, Unshackling the Hospitals, Wellington, 1988.
29. The technical analysis is far from convincing and not very robust, but the data was never released to allow independent assessment of the validity of its conclusions. See B.H. Easton (1994) “How Did the Health Reforms Blitzkrieg Fail?” Political Science, Vol 46, No 2, December 1994, p.214-233, for an elaboration of this argument.
30. Indeed the Public Finance Act has a rather bizarre terminology of ministers of the Crown “purchasing outputs” from their departments, apparently to simulate as closely as possible the noting of their being market oriented.
31. B.H. Easton (1995) “Systemic Failure”, Listener, December 23, p.114.
32. Pharmac even appears in the phone book in the private rather than government sector, although it is entirely government funded.
33. Dominion, 8 March, 1996. It should be noted that public spending on the latter three items is almost certainly trivial, but by mentioning them the public attention is diverted there, and far more significant cuts can be imposed behind the veil generated by the ephemeral. This is a well established blitzkrieg technique.
34. The public firmly resisted proposals to privatize the funding of health care.
35. There will be exceptions. Workers in one firm explained to me that they took the package which included the car because it was a means of obtaining a better vehicle than they could borrow on, so overloaded were they with housing debt.
36. A particular problem is that often the acquisition of skills useful for the firm, are industry generic so that the trained worker may be lured away to another firm.
37. For instance childcare facilities associated with employment (and/or a reputation for consideration for parents) are likely to attract a better class of applicants, making it easier to select quality workers.
38. The considerable amounts that some firms spend on promoting a corporate image can be destroyed by a picket outside the factory with the workers saying things like (as in Talking Union) “He’s a bastard – unfair slave driver – bet he beats his wife”
39. The first two items are cheaper (because they reduce administration costs) if they are provided at the firm rather than individual level, so there may be a deal between workers and the firm to obtain have these benefits provided through the firm. However in each case the benefit requires ongoing long term employment with the firm, especially if the entitlement is not portable (and it would not be in the interest of the firm to make it so).
40. The firm may also assist top staff with redundancy, redeployment, and transfer costs.
41. Although its turnover is so high we shall not be surprised if it soon begins to use the sort of strategy outlined here to stabilize it, if the government policy framework will allow.
42. I would think that many managers would not be able to cope with the strategy either. Workers tell of recently appointed chief Executive Officers who are obviously uncomfortable in their presence. But they could be replaced if industrial relations warrants a different strategy.
43. B.H. Easton (1991) Recent Changes in the Labour Market: Segmentation and Deterioration, Paper presented at “Policy for Our Times”, 17-19 July 1991.
44. One group of firms where the strategy might make above average sense (and at an early stage) in hospitals (especially those using advanced technology). The contracting out of a lot of low skilled and non-medical work will enhance the usefulness of the strategy.